What treasury bill means
A treasury bill is a short term IOU from the Federal Government.
The Central Bank of Nigeria issues them on behalf of the government to raise short term funds. They are sold at a discount to face value and redeemed at face value on maturity, so the investor's return is the difference rather than a periodic interest payment.
If you pay ninety two thousand naira for a bill with a face value of one hundred thousand naira maturing in a year, your return is eight thousand naira on ninety two thousand invested.
That structure matters when comparing them with a fixed deposit. The quoted discount rate is not the same as the true yield, because your outlay was less than the face value. The true yield is always higher than the quoted discount rate, and a saver comparing a bill with a deposit paying a stated interest rate should convert to the same basis.
Tenors are short, conventionally ninety one, one hundred and eighty two and three hundred and sixty four days.
How it is used
Treasury bills are used for capital preservation and short term parking rather than for growth.
A business holding funds it will need in six months. An individual saving for a defined purpose. An institution managing liquidity. In each case the objective is to keep the money safe and earn something rather than to maximise return.
There are two routes to buying them.
The primary market is the auction, conducted periodically by the Central Bank. Participation is through banks and licensed dealers, and there are minimum amounts.
The secondary market is where existing bills are bought and sold before maturity. This is how most individual investors access them, through a bank or a licensed securities dealer, and it allows exit before maturity at whatever price the market offers.
At maturity the face value is paid, and many investors roll over into a new bill automatically if they have instructed the bank to do so.
Anything longer than a year is a bond rather than a bill, and FGN bonds pay periodic coupons instead of being sold at a discount.
Key features
- Short term borrowing by the Federal Government, issued through the CBN
- Sold at a discount and redeemed at face value
- Conventional tenors of ninety one, one hundred and eighty two and three hundred and sixty four days
- True yield is higher than the quoted discount rate
- Bought at auction through banks and dealers, or on the secondary market
- Can be sold before maturity at the prevailing market price
How this works in Nigeria
Treasury bills are the standard naira instrument for savers who want government credit risk rather than bank credit risk, and they are accessible in a way most other instruments are not.
The practical points for a Nigerian investor are three.
Rates move with monetary policy, and they have varied widely. A rate that looked attractive in one cycle can look poor in another, and rolling over automatically without checking is how savers end up locked into a rate they would not have accepted.
Inflation is the real question. A nominal return that is positive can still be a real loss where inflation exceeds it, and Nigerian savers have experienced exactly that for extended periods. Treasury bills protect the naira amount, not its purchasing power.
Access is through banks and licensed dealers, and minimum amounts apply. Some banks and platforms offer smaller denominations by aggregating investor funds, and an investor using such a platform should understand what they actually hold and who holds it for them.
The credit risk is the Federal Government's, in naira. That is the lowest naira credit risk available, which is what the instrument is for. It is not a currency hedge, and it does not address exchange rate risk at all.
Treasury bill vs fixed deposit vs FGN bond
Three ways to hold naira and earn a return, differing in term and credit risk.
A treasury bill is short term government borrowing, sold at a discount and redeemed at face value within a year. The credit risk is the Federal Government's. It can be sold before maturity on the secondary market.
A fixed deposit is a bank product. You deposit for a term at an agreed rate, and the credit risk is the bank's, mitigated by deposit insurance up to the applicable limit. Breaking it early usually costs you the interest.
An FGN bond is longer term government borrowing, typically several years, paying periodic coupons rather than being sold at a discount. It carries interest rate risk if sold before maturity, because the price moves with rates.
For money needed within a year, a bill or a deposit. For money that can be committed longer and where you want a fixed income stream, a bond. In every case, compare on the same basis: true yield rather than quoted rate.
Limits and risks
The return is nominal. Where inflation exceeds the yield, the investor loses purchasing power while the naira amount grows.
They are naira instruments, so they carry full exchange rate exposure for anybody whose obligations are in another currency.
Selling before maturity means accepting the market price, which can be less than expected if rates have risen since purchase.
Minimum amounts and access through banks and dealers put direct participation out of reach for the smallest savers, who then rely on aggregating platforms whose structures vary.
And rates are set by conditions rather than by need. A saver requiring a particular return cannot obtain it from an instrument priced by the market.
Worth knowing
Compare the true yield rather than the quoted discount rate, and check what inflation is doing before you roll over. A Nigerian saver who rolls treasury bills automatically for three years without looking can preserve the naira figure while losing a meaningful share of what it buys.
Questions people ask
What is a treasury bill?
Short term borrowing by the Federal Government, issued through the Central Bank. It is sold at a discount to face value and redeemed at face value at maturity, so the difference is the investor's return.
What tenors are available?
Conventionally ninety one, one hundred and eighty two and three hundred and sixty four days. Anything longer than a year is an FGN bond, which pays periodic coupons instead.
Is the quoted rate the same as my return?
No. Because you pay less than face value, the true yield is higher than the quoted discount rate. Convert to true yield before comparing a bill with a fixed deposit.
How do I buy treasury bills in Nigeria?
At the periodic primary auction through banks and licensed dealers, subject to minimum amounts, or on the secondary market through a bank or licensed securities dealer, which is how most individuals access them.
Can I sell before maturity?
Yes, on the secondary market, at whatever price the market offers. If rates have risen since you bought, that price can be less than you expected.
Are treasury bills risk free?
They carry the lowest naira credit risk available, being government obligations. They do not protect against inflation, which can exceed the yield, and they carry full exchange rate exposure for anybody with foreign currency obligations.